Improvement of Economical infrastructure Technological Up gradation

Managing Balance of Payments

Exploitation of Natural Resources Scope of Employment Improvement of export competitiveness Benefit to consumers

 FDI

stands for Foreign Direct Investment Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets.

Strong and stable government Pro-active government policies Investor-friendly and transparent decision making process Sound diversified industrial infrastructure Comfortable power situation Abundant skilled manpower Harmonious industrial relations Quality work culture Peaceful life Incentive packages Cosmopolitan composition Fluent English Chennai ranked second-best by BT Gallup Survey of Best Cities to do Business (Dec. 2001)

1.Maharashtra Maharashtra received the lion's share of the FDI $2.43 billion (Rs 11,154 crore), which is 35% of the total FDI inflows in to the country. 2.National Capital Region NCR received $1.85 billion (Rs 8,476 crore) in FDI during the period. The region accounted for 20% of the total FDI. 3. West Bengal, Sikkim, Andaman & Nicobar Islands These states attracted the third highest FDI inflows worth $1.416 billion (Rs 6,050 crore) 4. Karnataka - $936 million (Rs 4,333 crore) 5. Punjab, Haryana, Himachal Pradesh - $904 million (Rs 4,141 crore)

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign Company has the following options to set up business operations in India :
By incorporating a company under the

Companies Act, 1956

A wholly owned subsidiary Joint venture company - existing company or new company with domestic partner

As an unincorporated entity Liaison Office Project Office Branch Office

Liaison office not permitted to undertake any commercial/trading/industrial activity The role of the liaison office is limited to Collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers

General permission to foreign entities to establish Project / Site Offices (temporary in nature) Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project General permission also for remitting surplus funds after completion of project on production of the following documents:

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes Branch Offices are established with the approval of RBI Permitted to remit outside India profit of the branch

Here, investment of foreign capital occurs in local resources. The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of existent regulations, loans on low rates of interest and specific grants Flow of Inward FDI may face restrictions from factors like restraint on ownership and disparity in the performance standard.

Foreign direct investment, which is outward, is also referred to as direct investment abroad

Horizontal Foreign Direct Investment: investment in the same industry abroad as a firm operates in at home. Vertical Foreign Direct Investment: Takes two forms:

1) backward vertical FDI: where an industry

abroad provides inputs for a firm's domestic production process 2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production

Green field investments occur when multinational corporations enter into developing countries to build new factories and/or stores. Developing countries often offer prospective companies tax-breaks, subsidies and other types of incentives to set up green field investments

Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.

Investments which aim at either penetrating new markets or maintaining existing ones

Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.

FDI Approval Procedure

Automatic Route in most Sector Government Route for few sectors

RBI

FIPB

No permission required, only to notify RBI within 30 days of issue of shares to foreign investors

Approval is granted generally in 30 days

19

1991-Foreign Investment Promotion Board FIPB 1996-Foreign Investment Promotion CouncilFIPC 1999-Foreign Investment Implementation AuthorityFIIA 2004-Investment CommissionSecretariat for Industrial Assistance (SIA)

Economic growth This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

Technology

Foreign firms bring new technology

Increased productivity of labor and capital Improved product standardization Reduced error rates

Foreign firms invest in new technology

Upgrades overall stock of capital More efficient in raising and using financial resources Unrestricted access to parent company's technology Access to tacit knowledge

Employment Generation and Labor Skills: Foreign firms generate hundreds or thousands of jobs They generate employment in suppliers

Export Competitiveness

Dominant technologies brought in by foreign companies makes products suitable for export Foreign technology increases production, reduces error rates and improves quality Foreign firms have strong distribution and marketing facilities Foreign firms have brand names that help exports

FDI crowds out domestic investment by

Being a monopolistic competitor Raises demand for money Raises interest rates

Foreign firms have more:

Advertising power Ability to dominate the market Predatory pricing to prevent entry

Financial inflows raise the exchange rates, making exports unattractive

Technology Technology brought may be inappropriate The technology may be too capitalintensive Pollution-intensive technologies may be exported from countries where they are banned Sometimes, external transactions allow foreign technology to be acquired more cheaply, especially if the technology is mature

Environment Foreign firms operating in regions where rules are non-existent or not enforced have greatly exceeded emissions and effluent levels allowed in their home countries Foreign firms have exercised significant political influence to prevent the imposition of rules regarding the environment

FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.
Coal and lignite.

Mining of iron, manganese, chrome,gypsum, sulphur, gold, diamonds,copper, zinc. Lottery Business

Agricultural or plantation activities

Housing and Real Estate Business

Banks No change in existing conditions. FDI permitted under automatic route upto 49% and thereafter upto 74% under Approval Route. Civil Aviation No change in existing conditions. FDI in Non-scheduled air transport services/ nonschedule airlines, Chartered and Cargo airlines permitted under automatic route upto 49% and thereafter upto 74% under Approval Route.

FDI upto 100% in publishing/printing scientific & technical magazines, periodicals & journals FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs. All investments are subject to the guidelines issued by the Ministry of Information and Broadcasting

FDI permitted for setting up hardware facilities such as up-linking, HUB, etc up to 49% under Government approval route FDI permitted in Cable Network up to 49% under Government approval route Foreign Investment (FDI/FII) up to 49% allowed under Government approval route in Direct to Home Service Providers. FDI limited to 20% FDI permitted in FM radio up to 20% under Government approval route

FDI upto 26% automatic route

allowed

on

the

However, license from the IRDA has to be obtained & There is a proposal to increase this limit to 49%.

FDI upto 100% is permitted under the automatic route for manufacture of drugs and pharmaceuticals (The following is the current position)

FDI upto 74% in the case of bulk drugs, their intermediates Pharmaceuticals and formulations (except those produced by the use of recombinant DNA technology) would be covered under automatic route. FDI above 74% for manufacture of bulk drugs will be considered on case to case basis.

Foreign Investment up to 100% is allowed in green field projects under automatic route Foreign Direct Investment is allowed in existing projects - up to 74% under automatic route - beyond 74% and up to 100% subject to Government approval

Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production Automatic up to 100% Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals - Automatic up to 100%

Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production Automatic up to 100% Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals - Automatic up to 100%

Petroleum and natural gas sector, other than refining and including market study and formulation; setting up infrastructure for marketing - Automatic up to 100% For petroleum refining activity 100% FDI is permitted in Indian Private Companies under automatic route and up to 26% FDI is permitted in Public Sector Undertakings with Government approval

FDI up to 49% (40%) permitted under automatic route Automatic Route is not available However, a foreign airlines are not allowed to have any direct or indirect equity participation 100% investment by NRIs/OCBs

100% FDI is permitted for the following activities:

Electricity Generation (except Atomic energy) Electricity Transmission Electricity Distribution Mass Rapid Transport System Roads & Highways Toll Roads Vehicular Bridges Ports & Harbors Hotel & Tourism

 FDI in Investing companies in infrastructure/service

sector (except telecom sector) will not be counted towards sectoral cap provided:

- Such investment is up to 49% &

- The management of the company is in Indian hands.

FDI in such companies will be through the FIPB route

Petroleum Sector (except for private sector oil refining)/ Natural Gas/LNG, Pipelines Investing companies in Infrastructure & Services Sector Defence and Strategic Industries Atomic Minerals Print Media Broadcasting Postal services Courier Services Establishment and Operation of satellite Development of Integrated Township Tea Sector

Gambling and Betting Lottery Business Business of chit fund or Nidhi Company Housing and Real Estate business except for the development of townships, housing, built-up infrastructure and construction development project Retail Trading Atomic Energy Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea plantations)

Most manufacturing activities Non-banking financial services Drugs and pharmaceuticals that do not attract compulsory licensing or involve use of recombinant DNA technology Food processing Electronic hardware Software development Film industry Advertising

Hospitals Private oil refineries Pollution control and management Exploration and mining of minerals other than diamonds and precious stones Management consultancy Venture capital funds/companies Setting up/development of industrial park/model town/SEZ Petroleum Products Pipeline

Electricity Generation (except Atomic energy) Electricity Transmission Electricity Distribution Mass Rapid Transport System Roads & Highways Toll Roads Vehicular Bridges Ports & Harbours Hotel & Tourism Townships, Housing, Built-up Infrastructure and Construction Development Project

Advertising and Films Computer related Services Research and Development Services Construction and related Engineering Services Pollution Control and Management Services Urban Planning and Landscape Services Architectural Services Health related & Social Services Travel related services Road Transport Services Maritime Transport Services Internal Waterways Transport Services

Domestic Policy : While the FDI policy is quite straightforward and getting increasingly liberalized for most sectors, once an investor establishes his presence, national treatment means that this investor is subject to domestic regulations, which are perceived as being excessive. Quality of infrastructure:Foreign investors are concerned about a number of problems with the infrastructure sector in particular, electricity and transport. Irregular and undependable supply complicates problems for foreign investors.

Procedures: Although approval for investment is given quite readily, actual setting up requires a long series of further approvals from central, state and local authorities. This introduces substantial implementation lags. Image and Attitude:

FIIs

Who are they??

FII means foreign companies investinf in financial markets of India International institutional investors must register with SEBI

Limits ownership in Indian companies

FII denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. SEBIs definition of FIIs presently includes foreign pension funds, mutual funds, charitable/endowment/university funds etc. as well as asset management companies and other money managers operating on their behalf.

FII stands for Foreign Institutional Investors.

FIIs can individually purchase upto 10% and collectively upto 24% of the paid-up share capital of an Indian company
This limit of 24% can be increased to sectoral cap/ statutory limit applicable to the Indian company by passing a board resolution/shareholder resolution FIIs can purchase shares through open offers/private placement/stock exchange Shares purchased by FII through stock exchange cannot be sold through a private arrangement Proprietary funds, foreign individuals and foreign corporates can register as a sub- account and invest through the FII. Separate limits of 10% / 5% is available for the sub-accounts

FIIs can raise money through participatory notes or offshore derivative instruments for investment in the underlying Indian securities

Where FDI is a bit of a permanentnature, FII flies away at the shortestpolitical or economical disturbance Entry and Exit is relatively very easy for an FII as compared to FDI. Entry difficultfor FDI because of infrastructureproblems. Exit more difficult because of archaic labor laws

FDI is more desirable than portfolio investment because the investments there under are made directly in the capital of the company and not in the secondary market FDI helps in increasing production and employment , FII does not affect production and employment .

FDI is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.

FDI 1. It is long-term investment

2. Investment in physical assets

FII
1. It is generally investment short-term

2. Investment in financial assets 3. Aim is to increase enterprise capacity or productivity or change 3. Aim is to increase capital management control availability 4. Leads to technology transfer, access 4. FII results in only capital inflows to markets and management inputs 5. FDI flows into the primary market

6. Entry and exit is relatively difficult

7. FDI is eligible company for profits of

5. FII flows market

into

the

secondary

the 6. Entry and exist is relatively easy

8. Does not tend be speculative

7. FII is eligible for capital gain

8. Tends to be speculative

9. Direct impact on employment of 9. No direct impact on employment labour and wages of labour and wages